The EUR/USD exchange rate experienced significant volatility following the latest Federal Reserve policy decision, initially surging to multi-year highs before retracing. According to analysts at ING, this movement represents a market adjustment rather than a fundamental shift in the U.S. dollar’s weakening trajectory, and they maintain a bullish Euro to Dollar forecast with a target of 1.20 by the fourth quarter of 2025.
In the immediate aftermath of the Fed’s anticipated 25 basis-point rate cut, the Euro briefly climbed above 1.19 against the Dollar—a high not seen in four years. However, the rally was short-lived, with the pair quickly sliding back below the 1.18 level. ING interprets this pullback not as a vote of confidence in the Dollar but likely as a technical position adjustment by short-term traders locking in profits.
The bank’s short-term modeling suggests that the fair value for EUR/USD, based on current yield spreads, sits around 1.1850. This analysis implies that any future dips toward the 1.17 level could present a strategic buying opportunity for investors looking to position for the expected medium-term climb.
Diverging Paths: Fed Dovish Pivot vs. Economic Uncertainty
The Fed’s move to lower its key rate to 4.25% was widely expected, as documented in the financial calendar from Reuters. However, the real story lies in the forward guidance. While the median projection among Federal Open Market Committee (FOMC) members points to two more cuts this year, the market’s expectations are far more dovish, pricing in a more aggressive easing cycle.
A key driver of this dovish outlook, as highlighted by ING, is a noticeable shift in the Fed’s focus. Chair Jerome Powell underscored mounting concerns over the health of the U.S. labour market, a signal that the central bank may be prioritizing economic support over a strict adherence to its 2% inflation target in the near term. This potential shift away from its traditional hawkish inflation mandate is viewed by ING as a structurally negative factor for the U.S. dollar.
This internal debate was put on full display as one committee member, Governor Miran, dissented in favor of a more aggressive 50 basis-point cut. This divergence in views, often covered in depth by analysts at Bloomberg, fuels questions about the Fed’s policy path and reinforces the market’s expectation for deeper cuts than the “dot plot” suggests. ING itself anticipates the Fed will deliver a total of four rate cuts as the economy works to find a stable footing.
The Bottom Line
Despite short-term fluctuations, ING’s analysis concludes that the fundamental drivers are aligning for a stronger Euro against the U.S. Dollar. The combination of a more dovish Federal Reserve, concerned with labour market data, and a market pricing in a steeper rate-cutting path creates a conducive environment for EUR/USD to grind higher. Their Q4 2025 target of 1.20 remains firmly in place, suggesting sustained strength for the common currency over the longer term. For the latest on central bank policies and their global impact, the Bank for International Settlements (BIS) provides invaluable research and analysis.
